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World Economic Situation and Prospects 2004 - SlideServe

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World Economic Situation and Prospects 2004 - SlideServe Powered By Docstoc
					The Global Economic Crisis
 and Its Impact on Africa

            Cairo
          6 June 2009
Crisis Unexpected?
•   A crisis foretold
•   Unsustainable global imbalances
•   International financial architecture
•   Ideology: deregulation, self-regulation,
        inadequate and inappropriate regulation
        capital account liberalization
•   Financial Globalization: growth, stability?
•   Most developing countries innocent victims
•   Policy responses: inadequate; double standards
•   International cooperation: G7, G20, UN
Globalization: finance>trade




                               3
Finance-investment nexus?




                            4
Financial globalization
  • Net capital flows from South to North
       (US largest borrower)
  • Cost of funds not generally lower due to
       financial deepening (more
       intermediation, financial rents)
  • Higher volatility
  • Lower growth, higher instability
Short-term capital
  inflows problematic
• No real contribution to investment,
     growth rates
• Asset (shares, real estate) price + related
     (e.g. construction) bubbles instead
• Cheaper finance for consumption binges
• Over-investment à excess capacity
• All exacerbate instability, pro-cyclicality
Contagion: crisis spreads
Financial sector contagion (incl. vicious circles):
   Sub-prime crisis à financial crisis
         à asset price deflation à liquidity/credit crunch
Financial crisis à Economic recession
   (including feedback loops)
Real economy contagion (incl. vicious circles):
à Less investment, especially abroad (FDI)
à Less consumption
   à Reduced demand for imports, i.e. for exports of others
   à Prices, output declines globally                         7
   à Growth, employment declines globally
Deflationary spiral
• Asset (stock, property) markets deflating
   à negative wealth effect
   à more bank insolvency
   à generalized credit squeeze
• Lower external demand, world trade
   à excess capacity
   à investment slowdown
• Depressed domestic demand
   à lower prices, output
   à lower employment, incomes
Financial impacts on
   developing countries
• Despite non-involvement in sub-prime debacle:
  à Emerging stock markets collapse greater
  à Reversal of capital flows, FDI also down
  à Spreads rise, much higher borrowing costs
• But financial positions stronger than during
     Asian + LA crises (more foreign reserves,
     better fiscal balances)
  But reserves rapidly evaporating with export
    collapse; fiscal space also disappearing 9
Globalization: Parallel fates




                                10
Synchronous growth: The US,
  transition & developing economies
9
                     7.9
8
                                                                                     7.6                       7.5
                                                                   7.2                     7.1
7                                                                                                                    6.9
                                                                                                   6.6 6.5

6                          5.7     5.7
                                                                         5.4
                                                 5.1
5
    4.5
          3.8      3.7                                 3.9                     3.9
4            3.5
                                                                                                 3.2         3.3
3                                        2.8
                                                             2.5

2                                              1.6

1                                0.8

0
      1999          2000           2001          2002          2003              2004              2005       2006b
                                                                                                                 11
                   US                     Ec. in Transition                                Developing Ec.
World economy in recession,
  recovery uncertain
Recession in most
  developed economies




                        13
Transition economies too




                           14
Growth slowed in all
  developing countries




                         15
Growth by main
  country groups
                Per capita GDP       Change in
                    growth rate     growth rate
                                           2009/
               2004                2009/ 2004-
                 -07   2008   2009 2008         7
World            2.6    0.9       -3.4   -4.3    -6.0
Developed
  economies      2.1    0.3       -4.1   -4.4    -6.1
Economies
  in
  transition     7.7    5.5       -2.6   -8.1   -10.2
Developing
  economies      5.7    4.0       0.1    -3.9    -5.6
Growth by main
  regional groups
                                                              Change in growth
                              Per capita GDP growth rate               rate
                                                               2009/       2009/
                              2004-07       2008      2009      2008      2004-7
World                              2.6        0.9      -3.4      -4.3         -6.0
Developed economies                2.1        0.3      -4.1      -4.4         -6.1
USA                                1.6        0.1      -4.4      -4.6         -6.0
Japan                              2.1       -0.6      -5.9      -5.3         -8.0
European Union                     2.4        0.7      -3.4      -4.1         -5.8
Economies in transition            7.7        5.5      -2.6      -8.1       -10.2
Developing economies               5.7        4.0       0.1      -3.9         -5.6
  Africa                           3.4        2.5      -1.0      -3.5         -4.4
  North Africa                     3.6        3.6       1.4      -2.3         -2.2
  Sub-Saharan Africa               3.6        2.2      -1.9      -4.1         -5.5
  East and South Asia              7.3        5.0       1.8      -3.2         -5.5
  East Asia                        7.8        5.3       1.8      -3.5         -6.0
  South Asia                       6.5        4.9       2.6      -2.4         -3.9
  West Asia                        3.7        2.6      -1.2      -3.8         -5.0
  Latin America + Caribbean        4.0        2.7      -3.0      -5.8         -7.0
 LDCs                              5.2        3.6       0.3      -3.3         -4.9
Regional GDP growth rates
  in PPP terms, 2007-2010
                                        n 2007    n 2008      n 2009      n 2010




                            Advanced         European       Emerging           Sub-         Central &     Middle East
             World          Economies         Union            &              Saharan       Eastern
                                                           Developing          Africa        Europe
                                                           Economies


Note: The IMF World Economic Outlook classification of the Middle East region includes Egypt, Iran, and Libya.
Source: IMF, World Economic Outlook Update, January, 2009.
Recent African growth
over
60 developing countries will see
    declining incomes in 2009
Strong US demand lifted
   developing country exports
                                   400


                                   350


                                   300


                                   250


                                   200
[ Billion $ dollars base 2000 ]




                                   150


                                   100


                                    50


                                         0


                                   -50


                                  -100
                                             1990   1991      1992    1993    1994     1995    1996     1997    1998      1999   2000   2001   2002   2003   2004   2005


                                                           Domestic demand in the US (1st difference)
                                                           Manufact. exports from the developing world (1st difference)                                             21
                                                           ¸>
Manufacturing demand supported
   high primary commodity prices
                                500                                                                                   1.8




                                                                                                                            Price index relative to price of manufact.
                                450                                                                                   1.6
[Billion $ dollars base 2000]




                                400                                                                                   1.4
                                350
                                                                                                                      1.2
                                300
                                                                                                                      1.0
                                250
                                                                                                                      0.8
                                200
                                                                                                                      0.6
                                150
                                100                                                                                   0.4

                                 50                                                                                   0.2

                                  0                                                                                   0.0
                                      90   91   92   93   94   95   96   97   98   99   00   01   02   03   04   05
                                           External balance primary exporters
                                           Manufactured exports from the developing world (1st difference)
                                           Price of energy (relative to manufactures). RHS                 22
                                           Price of raw materials & food (relative to manufactures). RHS
High commodity prices over
  • Last 5 years: rare opportunity for many
       developing countries – including LDCs
       – to generate substantial financial
       resources from higher primary
       commodity exports for investments and
       growth – largely over
  • 2008 price spikes for energy and food due
       to increased speculation following flight
       from ‘Wall Street’ (finance) to ‘Chicago’
       (commodity futures), other factors     23
Oil prices roller-coaster




                            24
Jan-08

Feb-08

Mar-08

Apr-08

May-08

Jun-08

Jul-08

Aug-08

Sep-08

Oct-08
         Monthly Crude Oil
           Prices ($/barrel)




Nov-08

Dec-08

Jan-09
Non-oil commodity prices




                           26
World food prices
  declining after spikes




                           27
Food prices will
  remain higher
World trade collapsing




                         29
Trade collapse consensus
South exports fall more




  Source: CPB
African export growth over
Agricultural prices rose + fell




       Source: THE-Ambrosetti based on IMF data; January 2000 = 100; f = forecast
Oil, metal prices more
Africa’s main trading
   partners (US$bn)
Global imbalances narrow
   with deflation




                           36
Trade impacts: summary
• Exports decline à
     all developing countries
• Terms of trade à primary exporters
• Trade surpluses,
    reserves may run down quickly
• But lower energy, food prices help
    net food and oil-importers
                                       37
Dollar volatility continues
Capital inflows contract
Share of global FDI
FDI inflows to Africa (US$bn)
Credit crunch continues
Borrowing costs
  remain high
Aid flows unreliable
African Aid Trends
Bilateral ODA (US$bn)
ODA to Africa
Can you see the ODA for Africa
against the G20 recovery effort?
Main DAC donors to Africa (US$m)
Net Aid Transfer?
• Net ODA is net of principal payments,
      but not of interest received on such loans
• Net Aid Transfer (NAT) is net of both
• Japan recently received >$2bn/year in interest on
      ODA loans
• NAT excludes cancellation of old non-ODA loan,
      e.g. a 2003 Paris Club agreement cancelled
      some $5bn in non-ODA official debt owed.
• That cancellation is ODA, but generated little
      additional net transfers, ie. NAT
• Hence, DRC received $5.4bn in ODA in 2003,
      but only $400m. in NAT
Livelihoods threatened
• Declining living standards
• Many livelihoods under threat, especially when
     social protection not well-developed
• Migrant workers especially vulnerable
• Prolonged slowdown in world economy likely
     to cause remittances, job creation, tourism
     and ODA to decline, unemployment to
     increase, particularly among youth
Remittances to developing
  countries, 2008-2010
Domestic demand
• Need to stimulate to offset weakened foreign
     demand for exports
[Problem: domestic productive capacities and
  capabilities lost with economic liberalization]
• Most countries’ fiscal space limited
     à need more policy space to cope
• Need domestic -- not external -- financing
• Build + improve infrastructure
• Strengthen social services, protection       53
Policy priorities
 • Contain spread of financial crisis
   - Across borders (contagion)
   - To real economy (ensuring liquidity)
 • Reflate economy
   - Fiscal measures (fiscal space needed)
   - Monetary measures (monetary space)
 • Appropriate regulatory reform
   - National
   - International                           54
Finance priorities
• Prudential risk management,
     including capital controls
• Counter-cyclical: limit pro-cyclicality
• Finance growth (output, employment)
• Development finance, e.g. crucial for
     investment + technology policies
• Inclusive finance
                                            55
Why stimulus?
• Need to stimulate to offset weakened foreign
     demand for exports
[Problem: domestic productive capacities and
  capabilities lost with economic liberalization]
• Most countries’ fiscal space limited
     à need more policy space to cope
• Need domestic -- not external -- financing
• Build + improve infrastructure
• Strengthen social services, protection       56
Global recovery with coordinated vs
uncoordinated stimuli, 2010-2015
Social impacts
• ILO: >200 m. more working poor
• ILO: Unemployment to rise by 51m
• ILO projections based on IMF 0811
• MDGs, IADGs, social spending at risk
• Rising social unrest
• US intelligence report:
    crisis -- greatest security risk
Poverty reduction set back
                      Slowdown in poverty
                      reduction compared
                      with pre-crisis growth
Total                     73 – 103 million

Africa                    12 – 16 million

East and South Asia       56 – 80 million

Latin America and           ~ 4 million
Caribbean
Extreme poverty worsens
                         Change in extreme poverty     (< $1.25/day)
                          No. of Poor              Change in poverty
                       ’09/‘04-’07    ’09/‘08    ’09/‘04-’07      ’09/‘08
 Transition
    economies                 0.6        0.6          0.3%         0.3%
 Developing
   economies               111.1        73.5          1.8%         1.2%
 Africa                       5.9        4.2          1.2%         0.9%
 North Africa                0.1         0.1          0.1%         0.1%
 Sub-Saharan Africa          5.8         4.1          1.6%         1.1%
 East and South Asia       101.0        65.6          2.0%         1.3%
 East Asia                   16.2       27.5          0.8%         1.3%
 South Asia                  84.2       37.8          3.0%         1.3%
 West Asia                    0.6        0.2          0.5%         0.2%
 LAC                          4.1        3.7          0.7%         0.7%
Social protection
   counter-cyclical
• Employment crucial for incomes, esp. for
     domestic demand, poverty reduction,
     multiplier effects
• Fiscal stimulus, esp. for job creation
• Conditional cash/income transfers
• Universal vs targeted social protection
• Social protection à demand maintenance62
Output, jobs recovery
  lags, 1991, 2001
Lags delay recovery
Coordination failure
Africa: % with <US$1/day
Children who completed
  primary school (%)
Girls/boys primary
   school enrollment
Under five mortality/1000
HIV prevalence (%):
  women 15-24 yrs
Social protection
   counter-cyclical
• Employment crucial for incomes, esp. for
     domestic demand, poverty reduction,
     multiplier effects
• Fiscal stimulus, esp. for job creation
• Conditional cash/income transfers
• Universal vs targeted social protection
• Social protection à demand maintenance71
Social spending
   low priority (11%)
Constraints on developing
   country responses
• IMF fiscal requirement for stimulus
• IMF claims developing countries likely to fail
• Policy -- including fiscal -- space constrained
• Monetary policy less effective, worse with
     independent central banks, fiscal authority
• Systemic, market, institutional pro-cyclicality
• Lost productive capacities due to openness  73
International responses
• UN, BIS forecasts more accurate than others;
    IMF, WB upbeat till late 2008
• IMF, WB also marginalized by G7, etc
• IMF discouraging strong fiscal stimulus by
    developing countries without surplus
• G7 à G20: more inclusive? legitimate? crisis-,
    but not developmental or equitable
• PGA (Stiglitz) Commission of Experts
• Doha Declaration: June 09 summit on impact
    of crisis on developing countries
New Bretton Woods
  moment?
Bretton Woods, 1944: United Nations conference
  on monetary and financial affairs
• 15 years after 1929 Depression
• Middle of WW2
• US initiative vs UK Treasury stance
• 44 countries (28 developing countries; 19 LA)
• IMF, IBRD, ITO – UN system
• Clear emphasis on sustaining growth, employment
      creation, development,
     not just financial stability
• But BWIs very different governance arrangements
UN leadership?
• Universal, legitimate à lead reform process?
• Ensure comprehensive systemic reform
• Ensure developmental financial system
• Ensure inclusive financial system
• Develop capacity for offering 2nd opinion    to
  interested member states
• Align IMF, WB with UNDA (including
      FfD), IADGs to ensure policy coherence
Thank you
Please visit UN-DESA www.un.org
  G24 www.g24.org and PGA
  www.un.org/ga/president/63/ websites
• Research papers
• Policy briefs
• Other documents

Acknowledgements: UN-DESA, ILO, ESCWA    77

				
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